Life insurance covers only part of our mortgage term

Q&A:We purchased a house as first-time buyers in 2007 with Permanent TSB. As part of the purchase, PTSB advised us that we would require mortgage protection insurance in the form of life cover to cover the mortgage in the event that either of us died. They arranged the cover for us with Irish Life.

When we were reviewing the documentation the other day, we realised we were only given a 10-year policy. Our mortgage is for 35 years. We are currently in year six, so the life insurance only covers 50 per cent of the mortgage and in year 10 it will cover less than 10 per cent of the remaining mortgage.

We were led to believe the cover PTSB required, and that we were being sold, would last the term of the mortgage and cover the full remaining mortgage.

I have contacted PTSB but have not heard anything back yet. As we have just discovered we are under-insured, should we be looking for alternative mortgage protection insurance or should we wait until we hear back from PTSB?

Ms CB, email

Even allowing for the fact that your mortgage was taken out in the heat of the property bubble, the circumstances surrounding it still sound extraordinary to me.

I’m not saying it has never happened – from your experience clearly it has – but I have never before come across a situation where a mortgage lender will sanction a first-time buyer mortgage which is not covered by matching life insurance policy (mortgage protection) – even in those crazy years.

Mortgage protection is a key instrument in ensuring the lender gets repaid in the event of an untimely death. More importantly, it provides security for you, the borrowers, that you will not be forced to sell your home in those extreme circumstances.

That is why, by law, a lender cannot sanction a mortgage to a borrower unless it is properly covered for the full term by mortgage protection.

There are, as always, exceptions. The most straightforward is if the borrowers already have sufficient life insurance to cover the mortgage – though it will have to be allocated to cover the mortgage specifically. If the property is an investment rather than a principal private residence, you can also sidestep the requirement, or if the borrower is over the age of 50.

In all these circumstances, the lender is entitled to proceed without cover – though, in my experience, very few do so.

There is one final exception and this is the one which may be relevant here. The lender apparently can proceed if the mortgage applicant cannot secure life cover – generally for medical grounds.

Having checked with Permanent TSB and Irish Life, it appears that the life company would provide cover only for 10 years for health reasons. You don’t mention this specifically in your letter, but I am assuming these are not contested.

Irish Life tells me the 10-year restriction was made expressly clear to you both at the time the mortgage documentation was signed.

I understand that this was not a case of simply signing where an “x” was marked in one of a series of places in a complex document. Rather, there was a separate letter of acceptance of the terms of the mortgage protection policy which, I am assured, very clearly pointed out the cover was being issued on special terms and highlighting the 10-year term.

Hopefully, you will have a copy of this in the documentation which you recently review. In any case, one would certainly have expected such a restriction to have been brought to your attention by the solicitor acting for you in the home purchase.

However, it does raise a whole series of issues. First, quite clearly, even over the 10-year term, there will be a mismatch in that your cover is declining over 10 years while the actual mortgage outstanding is declining far more slowly as it is over a 35-year period. Thus, even in the 10 years for which you are covered, any payout might not cover the outstanding mortgage.

More seriously, as it stands, unless you managed to get a waiver from PTSB from any liability in the event of one or other of you dying during the mortgage term (which again would certainly be in writing), you face the prospect of having to continue to fund the mortgage or face having to sell your home in those circumstances.

Should you be looking for alternative insurance? Very much so. With a 35-year term on a property bought at the peak of the bubble and now almost certainly deep in negative equity, you have a very significant debt overhang.

Securing such cover should not preclude you pursuing enquiries with PTSB as to the extent of its search for appropriate life cover in your case. Irish Life was at that time part of the same group and, not unnaturally, would have been the first port of call for a PTSB mortgage intermediary.

However, having been turned down for cover over the full term, it would be expected that enquiries would have been made of other insurers to see if appropriate cover could be arranged.

I am not certain of the precise obligations of the lender in this regard under the legislation, but it would at first sight appear incumbent on them to go beyond any tied agency.

Of course, there is nothing obliging you to go with the cover offered by your lender and you would have been entitled to arrange your own cover as long as the lender was satisfied it provided adequate protection. Clearly, in your situation, any policy giving 35-year protection would be preferable to what you now have.

Finally, it is never good to hear that financial services businesses are failing to respond to customer queries. Permanent TSB tells me it is checking what happened in this instance.

This column is a reader service and is not intended to replace professional advice. Please send your questions to QA, c/o Dominic Coyle, The Irish Times, 24-28 Tara Street, Dublin 2, or to dcoyle@irishtimes.com. No personal correspondence will be entered into.